Common tax increase surprises: I did't owe that last year!
Picture this: For the past few years you've received your tax return and have had a small but nice refund. Now imagine your surprise, when next year, you are required to send in a fairly big check to settle your tax bill. Believe it or not, this message is almost as hard to deliver to a taxpayer as it is to hear it. Here are some situations to watch for that can increase your tax liability:
New tax laws. The Tax Cuts and Jobs Act is the most impactful tax reform in years. While the goal of the legislation is to reduce taxes, there are several changes that could cause you to pay more taxes, including:
- Removal of the personal exemption
- Capping of the state and local tax deduction (SALT) at $10,000
- Removal of the deduction for home equity loan interest not used to buy, build or improve your home
- Removal of the deduction for unreimbursed employee expenses and other miscellaneous expenses
A spouse passes away. The tax surprise related to this event tends to hit older taxpayers the hardest. In the year of death the tax impact is not usually felt. The year following death, the tax surprise hits hard because of the following tax changes:
- Lower standard deductions
- You move from a joint filing status to single (or head of household)
A child is no longer eligible. As children get older they grow out of lots of things — clothes, interests and tax credits. Here are some age requirements for popular tax benefits:
- Child and Dependent Care Credit: under age 13
- $1,000 Child Tax Credit in 2017 (raising to $2,000 in 2018): under age 17
- Earned Income Tax Credit: under age 19 (24 if a qualified student)
Earnings with Social Security benefits. If you are recently retired, start collecting Social Security Benefits, and then begin working part-time, you are also in for a tax surprise. These extra earnings could not only make your benefits taxable, it could result in a reduction of benefits received.
Other life events. Other life events could provide a tax surprise for you. While some may have positive tax consequences, like a new birth, or becoming the head of household, others might surprise you and result in additional tax. Other common life events include retirement, death and entering/leaving school.
Capital gains surprises from mutual funds. Often sales of investments are a planned event. Unfortunately, many mutual funds sell assets and then you receive a capital gain statement with a surprise taxable event.
Want to avoid these surprises? Spend some time now reviewing your anticipated tax situation for 2018. By doing so, perhaps a planned “pleasant” surprise can be in store for you next year.